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Dear Commercial Acuman...

Dear Commercial Acuman...
I heard Ron Baker talk about value pricing recently; how can I implement it in my agency? Agency Group Commercial Director

That is a great question – but before I can answer it, I’ll need to know a few things from you.

Most important will be your target date, what you understand by the implementation (full, partial or limited) and what resources you can provide to assist with the project. I will also need to know more about your current business model and client base, plus your staffing and skills mix.

I suggest we start with an initial review; if you then decide to proceed with implementing value pricing, we will scope out the task and key milestones in much more detail. At this stage, I can give you a few initial pointers. However, before I start, I need to ask you what the budget is for giving you this advice. You see, I don’t charge on an hourly basis; time is a constraint, not a value-generator. So let me know what’s my budget for doing this and we can proceed?

The good news is, whatever we agree on, for this advice I will give you a value guarantee:

  • If you have any questions, I guarantee you unlimited access to ask me about it
  • If you read my advice and don’t find it useful, I will provide you with any other of my services to the same value as what you expected to get from it

So, now we are agreed on outcomes, scope and price, let me provide you with the first instalment.

Value pricing is anything that is not cost plus margin - it can be fixed price, commission, menu pricing or product pricing; the only consistent theme is that input cost is never the basis for price conversations.

Key features of value pricing:

  • The primary focus of value pricing is on the effectiveness of the outputs generated, rather than the efficiency with which they are generated
  • As a result, it is the value of outcomes that drives pricing, not the cost of inputs. There is a general focus on outcomes and not inputs, i.e.
  • The price is based on demonstration of economic value to be delivered to the customer, not on the financial costs to the supplier to produce
  • This makes value pricing more forward-looking and outward-looking, rather than inward and historical
  • Value pricing involves the supplier taking on more of the client's risk and being remunerated for this; they commit to deliver an agreed result by an agreed time, rather than to provide certain resources for an agreed duration
  • To manage those risks, this commitment is subject to a thorough listing of assumptions; a change in any one of these leads to a review of the original scope and potentially a conversation with the client about the ramifications of changes
  • Value pricing starts with the value to the customer, then moves to price discussions and finishes with cost. It is forward-looking and project management in approach. It needs time to establish outcomes, then scope out work, set out assumptions, draw up a project plan and agree on the price. Much more effort goes into pricing upfront before the work starts.
  • Value pricing conversations begin with an extensive diagnostic process to define precisely the required outcome.

Because value is economic, external and subjective, it is not best calculated by bean-counters whose focus is on accurately recording factual historical internal costs; it needs a pricing specialist.

Because value pricing involves taking more risk such as taking on the client's pricing and delivery risk, guaranteeing outputs and outcomes, it needs an expert in pricing risk - it also needs more work on defining the expected results and project managing the client.

Find out more about Ron Baker

Last updated 11/02/2016

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